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Jonathan Watson
December 1, 2021

How will the Omicron strain affect the pound in December?

How will the Omicron strain affect the pound in December?

The pound has struggled to retain it’s more recent dominance following the emergence of the Omicron Coronavirus strain in recent days. The pound has dropped over 2 cents against the Euro from over 1.19 to the low 1.17s as investors become fearful over the potential for this issue to derail the recent economic confidence and expectations of an interest rate hike later this month.

The pound has been supported as the prospect of the Bank of England raising interest rates on 16 December had continued to mount in recent weeks. The rising inflation number and improving labour market data all suggested the bets on a December rate hike could prove correct.

However, the Omicron news has derailed this and caused global attitudes to shift firmly back to the COVID pandemic and the economic consequences of either lockdowns or other restrictions on economic activity.

Sterling is stronger against some currencies including the Australian dollar, where it is felt that lack of booster program and other vaccine resistance there will see worse affects down the line. The UK in having one of the more advanced booster programs and a government intent on supplying as many as possible, could see the pound supported and not too badly off, depending on how the new strain performs.

Much will therefore depend on just how the Omicron strain pans out, with exact tests on the efficacy of current vaccines against the new strain not expected for 2-3 weeks. So far, the case numbers of this strain do not appear to be rising too dramatically and the government has not implemented any measures which could prove too restrictive of the economy.

What is clear is that with the Christmas party season about to kick off and consumers getting ready to do their Christmas shopping and socialising, there could be plenty of opportunities for mixing which might ultimately cause the strain to spread.

Will the Bank of England hike interest rates?

The Bank of England has proved they usually err on the side of caution in these cases, and despite the more recent economic data seeming to support a hike, with the prospect of the Omicron variant causing problems over Christmas and the New Year, there is definitely a fresh reason to be cautious.

We know from recent history how quickly these COVID situations can escalate and with the economy still being so fragile, it would surely be quite a bold decision to launch into a hike cycle. Despite this, the Bank of England will be under huge pressure to stick to their word so December’s meeting is shaping up to be very important.

If you have a transfer involving the pound coming up in December or the New Year, please speak to our team about the full ins and outs of the market and the various options we have to help limit your exposure to the currency markets.

Euro rises on better data but could Omicron strain upset the trend?

The Euro has been stronger against the pound following some impressive economic data yesterday showing the German economy is recovering with a falling Unemployment rate from 5.4% expected to 5.3%.

The Euro was also boosted by rising inflation which suggests that an interest rate hike should be somewhere in the ECB’s mind as we move into 2022. Whilst the European Central Bank had ruled out any hikes in 2022 previously, this news might make that less likely and helped the Euro to firm up a bit more against the weaker pound.

The Omicron strain is undoubtedly a factor with negative potential for the Eurozone, but with vaccine programs quite well established the Eurozone is not one of the worst affected regions in the world.

Recent public protests against lockdown measures in Austria are an example that not all is rosy when it comes to the pandemic and government responses in the Eurozone, so it will be interesting to see how the Omicron strain impacts the Eurozone and respective economies.

A big driver for GBPEUR levels in recent weeks has been interest rate expectations which have supported a much stronger pound with markets predicting the Bank of England would raise rates this December or early February.

The recent slide in global confidence because of Omicron has seen the pound lower against the Euro and this will undoubtedly be a key factor shaping GBPEUR levels over December. The key date is 16 December when the Bank of England next meet and it seems reasonable to expect this as one of the key topics in December for GBPEUR levels.

If you have a currency exchange planned for the Euro in December or the New Year, please speak to our expert team about all the events that might move your rate and to be kept alerted to the news.

What will drive US dollar exchange rates this week and in December?

This week is a key one for the US dollar with the latest US Non-Farm Payroll data which is always seen as one of the bigger economic releases of the month. Detailing the latest change in non-agricultural employment it provides a key snapshot of the latest economic activity.

The US Federal Reserve have been looking to raise interest rates and any signs of rising employment to match the growing economy and rising inflation might be supportive for the US Dollar, in making it more likely that the Fed will look to raise interest rates.

Of course, the Omicron strain could be a big threat to any optimism, and the US dollar as a safe haven currency could find some support should global sentiment deteriorate and investors become concerned that much of the progress the world has made in 2021 is going to be undone.

The US dollar has so far not been too moved by the latest Omicron news but there is potential from this, investors will be closely watching how the latest twist of the COVID pandemic develops before making firm judgements.

Friday’s Non-Farm Payroll and labour market data looks like it could be important in shaping the latest market sentiment as we approach the 15th December meeting where investors will be closely monitoring the commentary from the Fed to better understand any interest rate hikes that are planned for 2022 as well.

Fed Chair Jerome Powell spoke yesterday and indicated that monetary support was potentially needing to be scaled back sooner than later as inflationary pressures are building up. This might take the form of scaling back the monetary support in recent years which has underpinned a very strong US economic recovery.

Powell also acknowledged the threat of Omicron and it will be interesting to see the impact of this strain on his plans as we learn more in the coming days and weeks.

If you have a transaction involving the US dollar ahead, speak to our team to learn more regarding the latest news and outlook that could shape the market movements.

This blog post is intended to provide you with information on the services Lumon Pay Ltd (“LPL”) offer and should not be interpreted as advice or as a solicitation to offer to buy or sell any currency or as a recommendation to trade. Foreign exchange rates provided therein are for indicative purposes only and are not intended to give an accurate reflection of current currency exchange rates or to predict future movements in currency exchange rates. LPL, trading as Lumon, is a company registered in England with its registered address at Building 1, Chalfont Park, Gerrards Cross, Buckinghamshire SL9 0BG. LPL is authorised by the Financial Conduct Authority as an Electronic Money Institution (FRN: 902022).